Experts say emergency savings are crucial, especially during a recession. According to a new report from Investopedia, the average American family should aim to have at least $35,000 in emergency savings in 2025. This amount represents six months of emergency expenses, covering about two-fifths of a typical household’s annual income.
Financial experts recommend that families accumulate enough emergency savings to sustain them for three to six months. An emergency fund protects against unexpected events such as job loss, health crises, car breakdowns, or major household repairs. These savings become significant during economic uncertainty.
Investopedia calculated the costs of six months of housing, utilities, food, medical care, and car payments for a household of at least two people. The breakdown includes $11,635 for medical care, $10,621 for cars, $9,785 for housing and utilities, and $3,176 for food. However, most American households don’t have that much cash readily available.
According to the Federal Reserve, the $35,000 figure is four times the median balance of combined checking and savings accounts in American households, which stands at $8,742.
Importance of emergency funds
According to a March survey by WalletHub, at least one in five Americans has no emergency savings at all.
WalletHub CEO Odysseas Papadimitriou finds this statistic alarming: “Emergency savings should be the top priority of every household, above everything else.” Without it, “you are completely exposed to financial disaster.”
The good news is that even a small emergency savings account is better than nothing. Research by Vanguard found that having at least $2,000 in emergency savings yields a 21% boost in financial well-being compared to having no emergency fund. People without emergency savings are more likely to experience financial stress.
To build emergency savings, experts suggest putting the funds in a high-yield account, keeping them out of easy reach, and considering automated deposits. In the current interest rate climate, annual returns of 4% or better can be found on emergency savings accounts, particularly from online banks with low overhead. Opening a separate account with a different financial institution makes it less likely to raid the account.
Automatic contributions, either through direct deposit from an employer or self-set automated transfers, can help amass savings methodically. Even $10 a week adds up to more than $500 after a year. In conclusion, building an emergency fund is crucial for financial stability, especially in these uncertain times.
Taking these steps can help ensure you’re better prepared for whatever life throws your way.
